Making the best of your pension and savings by investing sensibly to maximise returns and minimise tax is the double trouble of tax and provider fees.
Tax policy is based on consumer choice – basically you can decide where and how to save for the best tax and growth benefits. You then pay the tax on how you draw and spend that money.
Instead of giving retirement savers an interlinked menu of options, Britain has ended up with a hotchpotch of laws made on the hoof to solve political issues rather than benefit consumers.
For instance, Chancellor George Osborne’s recent change of tack in Budget 2014 to give pension investors easier access to their cash has a political spin of giving consumers more choice.
The reality is the policy is the result of years of wrangling between the government and pension providers over poor returns and high charges trimmed off money that the Treasury has tax-relieved as an incentive to save.
Destroying annuities
Pension firms failed to play to the government’s tune – so Osborne and pensions minister Steve Webb collaborated to pull the rug out from under their lucrative businesses.
The first stroke was destroying annuities. A series of rule changes first removed the compulsory purchase of an annuity and altered the way providers advertised their products in a bid to make the market more competitive.
Next, consumers with direct contribution pensions – typically those without a guaranteed pay-out on retirement –can have easier access to their cash from April 2015. Those with pots of less than £30,000 are already benefitting.
Providing the consumer pays the right level of tax on their drawdown, the government has lifted all restrictions on how that cash can be spent.
The big switch
Now, pension and annuity companies are struggling to come to terms with the decimation of their business.
They are talking about new products, innovation and cutting costs to give better returns.
Instead of waging this constant war of threatening financial firms to give better deals to consumers behind closed doors, the government has brought the argument out into the open.
But what Osborne and Webb have effectively done is switched the cash benefit that was going into the pockets of pension providers to the Treasury as tax on easier access to the money.
On the face of it, the consumer wins, but when it comes to spending power, that consumer is really just paying a big slice of their savings to the government instead of a financial business.
